Executive pay: don’t believe the headlines

Open yesterday's or this morning's papers, and you'll find plenty of reports about the snouts of FTSE100 chief execs being in the trough again, while the rest of us suffer. Their pay is up 49 per cent, we read. Most people’s first and only response to these accounts of the Incomes Data Services' (IDS) latest findings will be anger — and understandably so. But much of this anger and reportage is based on a mis-reading of the actual report.

The BBC's influence is huge. Its original report compared the rise in base salaries (which wasn’t 49 per cent, but a much less impressive 3.2 per cent) with a median rise for private sector workers of 2.6 per cent, but nowhere in the IDS press release does it say whether the rise in remuneration or salary among the FTSE100 directors is a median or a mean. That is pretty important. With a sample of directors at just a hundred mainly-globalised firms — hardly a proxy for employers in general — it is very possible for a small number of very large pay rises to bias the overall result.

For example, the BBC also reports that the highest paid chief executive was Mick Davis at Xstrata, who enjoyed a substantial £18.4 million. But his company’s profits grew by a massive 332 per cent in the calendar year. That suggests there might be special circumstances there that could explain a significant change in his remuneration and skew the overall findings.

Ryan Bourne, of the Centre for Policy Studies, contacted IDS and discovered that the median rise in total earnings is actually 16 per cent, much less than the rise reported in all the headlines. You'll be hard pushed to find this figure in any of the newspapers (even the FT). Comparing the 49 per cent mean rise in total earnings with the 2.6 per cent rise in median salaries as the Telegraph did is pretty much meaningless. The 16 per cent to 2.6 per cent comparison is still striking enough to make a point, and has the advantage of accuracy.

The results have been presented as the consequence of drastic rises in bonuses. But look at the figures in the press release. Apparently, FTSE100 directors saw their average bonus payments increase by 23 per cent and their base salary grow by 3.2 per cent. But somehow that adds up to a 49 per cent increase in total remuneration. That suggests that the bias from a small number of very large settlements isn’t the only issue here. Changes in the value of benefits accumulated over years, thanks to rises in share prices for example, or passing the threshold of a Long-Term Incentive Plan, could be being counted entirely as income this year and be responsible for a lot of the increase in remuneration. It is hard to tell, and that’s the real problem.

There is a reasonable and important debate to be had about whether we need more shareholder activism to control executive remuneration and ensure it does not become excessive or reward failure. And, much more importantly, about whether measures that are squeezing middle-income families need to be scaled back.

But just because FTSE100 directors are doing better than the rest of us, it doesn’t mean that there's no problem with wildly overstating how much better they are doing. While the protestors in the City seem to be mostly harmless hippies, the ‘us versus them’ rhetoric of the 99 per cent versus the 1 per cent has the potential to become very ugly. The picture to the right, taken by an American blogger at Occupy Oakland, is one example of how. All across Europe people are very angry. Stoking that anger with an exaggerated statement about the fortunes of FTSE100 directors will make it that bit harder for us to keep things in perspective.

After all, these directors are some of the high earners whom the left believe can finance our bloated government. We need them to be leading successful international companies, earning their spectacular incomes and paying their taxes here. That, of course, doesn’t mean they should be above criticism — as well off public figures they can take it — but they do at least deserve some honesty.

Matthew Sinclair is director of the Taxpayers' Alliance.